In an earlier article here, I argued that Barrick (ABX) would outperform Newmont (NEM). Thus far, it has beaten Newmont by 477 basis points. With the Fed's recent announcement that it will be extending low interest rates into 2012, investors now have more reason than ever to back gold producers. While I find meaningful upside in both firms, I continue to expect outperformance by Barrick.
From a multiples perspective, Barrick is the cheaper of the two. It trades at a respective 11.3x and 8.8x past and forward earnings while Newmont trades at a respective 12.9x and 11.1x past and forward earnings. In addition, Barrick is rated near a "strong buy" while its competitor is rated a "hold". On the other hand, Newmont has a dividend yield that is roughly double at 2.3%.
At the third quarter earnings call, Newmont's Richard O'Brien, also noted progress in several respects:
Across our wider project pipeline, we have advanced approximately 20 earlier-stage development assets through our project pipeline in each of our 4 operating regions thus far in 2011. Our investment-grade balance sheet continues to strengthen as we delivered our 11th straight quarter of increase in gross margin, while generating quarterly records of revenue at $2.7 billion, operating cash flow of $1.3 billion and net income of $635 million adjusted. We also ended the quarter with over $3 billion in cash and marketable securities. We also continued to explore one of the most extensive land positions in the gold industry. Across our exploration portfolio, we are currently operating 100 drill rigs around the globe in over 40 locations, spanning greenfields and brownfields projects, as well as surface and underground opportunities.
Management recently gave production and cost guidance that was overall disappointing. Mid-point gold and copper production was guided at 5.2Moz and 205Mlbs, respectively. Copper figures were particularly disappointing with a mid-point decline of 22%. Management is aiming for 60% of its $3 - $3.3B capex program to be channeled towards growth initiatives, like at the Conga and Akyen projects.
Consensus estimates for Newmont's EPS forecast that it will grow by 17.4% to $4.52 in 2011 and then by 20.8% and 7.5% in the following two years. Assuming a multiple of 13x and a conservative 2012 EPS of $5.82, the rough intrinsic value of the stock is $75.66, implying 24% upside.
Barrick has even greater upside from faster earnings expansion. More mines are going into production over the next two years, which will spike free cash flow generation. Some analysts have bemoaned the risks inherent in executing at Pueblo Viejo, Jabil Sayid, and Pascua Lama; but, Barrick has the terrific track record and a solid reserve base that hedges. The first two projects will kick in around mid-2012; the last, around mid-2013. At the same time, Zaldivar and Lumwana offer attractive diversification in copper and may contribute as much as 15% of cash flow.
Consensus estimates for Barrick's EPS forecast that it will grow by 46.7% to $4.87 in 2011 and then by 16.4% and 18% in the following two years. Assuming a multiple of 12x and a conservative 2012 EPS of $5.63, the rough intrinsic value of the stock is $67.56, implying 37.7% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
